Raising Interest Rates: What does it Mean for You?

Earlier this month, the United States Federal Reserve increased interest rates for the third time since the 2008 housing market crash. With the Federal Reserve being the center point for the entire nation’s monetary system, it is in your best interest to know what exactly the Federal Reserve does and what a raise in interest rates means for you.

So, what do they do?

The Federal Reserve (also known as “the Fed”) performs five general functions: conduct the nation’s monetary policy to promote maximum employment, promote the stability of the financial system, promote the safety and soundness of individual financial institutions, foster payment and settlement system safety and efficiency, and promote consumer protection and community development. To read a more about what the Fed can and cannot do, click here.

Ever since the recession of 2008, the Federal Reserve has been working to initiate economic growth that promotes both employment as well as inflation by lowering interest rates. This makes it easier for smaller, private banks to get money, and, therefore, easier for the public to establish lines of credit and take out important loans.

Upon recovery from the 2008 housing crash, banks were able to offer homebuyers more affordable mortgages that would not require them to pay an astronomical amount of interest over the course of their mortgage term. As the demand to purchase homes increased, so did their prices. Now, home prices are at an all-time high while interest rates remain considerably low.

Because of this, the Federal Reserve has decided to put more focus on increasing interest rates and controlling inflation, rather than homeownership promotion. The Fed’s Chair, Janet L. Yellen, told reporters that the Fed is still planning to move slowly and wait and see what tax and spending decisions are made by the new administration before making any new changes. Other economists are expecting the Federal Open Market Committee to vote to move more quickly with a series of interest rate increases throughout the rest of the year.

Ellen Zetner, Chief U.S. Economist at Morgan Stanley, a global financial services firm, expects the Fed to raise rates yet again in June.

So, what does this mean for you?

Though we cannot say for certain whether or not interest rates will increase further in the coming months, we can tell you whether a higher or lower interest rate leans more in your favor:

• Higher: for those who wish to save their money; you will also see a higher return on your deposits over time.
• Lower: for those who would like to take out a loan or make an investment; but be careful, you will be paying more in interest rates over time. Smaller loans, such as car loans, will see greater impact in interest rates than larger loans. Those with credit card debt will also benefit from a lower interest rate because, currently, high interest rates are causing close to a quarter of a percentage point increase in interest payments.
• Either: longer-term loans, such as mortgages, will be affected either way, but the affects will be subtle.

These are just some of the short and long term outcomes that come with any interest rate increase or decrease. The long-term effects on the housing market, employment, and price of goods and services will depend on multiple factors from both the monetary policy of the Federal Reserve and fiscal policy of the executive administration.

Get to know the Fed and take careful stock of what you have borrowed, invested, spent, and save; and remember, “…through knowledge and discipline, financial peace is possible…”

- Dave Ramsey